The North American manufacturing industry outlook remains stable, Moody's Investors Service says in a new report. Earnings growth is expected to be modest over the next 12 to 18 months, as is global economic expansion. Overall macroeconomic sluggishness and a strong dollar will weigh on manufacturers' credit profiles, and will be especially vexing for those serving the oil and gas exploration and production sector.
"The mixed macroeconomic environment, assisted by the US dollar's strength, will continue to constrain EBITDA growth in North American manufacturing to levels that are approximately half our expectations just six months ago," says Vice President -- Senior Credit Officer, Chris Wimmer. "We expect median industry organic EBITDA growth of 2% to 2.5% in both 2015 and 2016, despite what should be easier year-over-year comparisons and an expected recovery in oil and gas company capital spending."
Although purchasing manager sentiment is still bullish and indicates that manufacturing activity is expanding, Moody's believes global economic growth will remain subdued. The rating agency expects G-20 GDP growth of 2.5% to 3.5% both this year and next on the back of continued, if slow, improvement in the US, a modest recovery in Europe and gradually slowing growth in China. And though it has weakened during the first half of 2015, consumer sentiment in the US is still relatively strong.
Most manufacturers will continue to benefit from lower costs for energy, transportation and resins, Wimmer says in "Profit Gains to Be Modest as Strong Dollar Constrains Growth." But those with significant exposure to end markets tied to oil exploration and production customers will continue to operate in a difficult environment, though they should see some relief next year as oil prices rise, with capital spending by those customers picking up as a result.
"Among industries, weaker demand is leading to fewer orders for agricultural, coal mining and upstream oil operations equipment over the next 12 to 18 months, while the defense industry continues to feel the negative effects of uncertainty around US military spending," says Vice President -- Senior Analyst, Paul Aran. "Short-term growth prospects for manufacturers serving the midstream oil and gas sector have moderated as the energy malaise moves down the refinement chain, while we expect stronger growth in end markets connected to commercial aerospace and heating, ventilation and air conditioning."
